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Caesar Chávez drives campaign of oil seizures

Financial Times

By Benedict Mander in Caracas

Published: May 11 2009 03:00 | Last updated: May 11 2009 03:00

A fresh round of expropriations in Venezuela has raised fears that the Opec member’s already declining oil output could sink to its lowest level in 20 years.

Troops were mobilised over the weekend to assist PDVSA, Venezuela’s state-owned oil company, in seizing the assets of 60 oil service companies, after a law was approved last week that paved the way for the state to take increasing control of its all-important oil industry.

“To God what is God’s, and to Caesar what is Caesar’s,” said Hugo Chávez, Venezuela’s president, as he presided over the expropriation of at least a dozen rigs, more than 30 oil terminals and some 300 boats. “Today we also say: to the people what is the people’s,” the socialist leader said to roars of approval from red-clad supporters on the shores of Lake Maracaibo, the heart of the nation’s oil production.

This move forms part of a broader assault against the private sector, which Mr Chávez has increasingly blamed as Venezuela slides into recession. Simultaneously he is engaging in what opposition leaders say is a campaign of persecution of his political foes.

Manuel Rosales, a former presidential candidate, has been granted asylum in Peru to escape arrest over corruption charges, while congress has removed almost all the spending powers of Antonio Ledezma, the anti-Chávez mayor of Caracas. Other opponents have been jailed or gone into hiding.

PDVSA, which is suffering from a sharp fall in export income, made the surprise move against the oil service companies in response to their threat that they would suspend operations until it paid a backlog of invoices. Some, including Helmerich & Payne and Ensco International,abandoned rigs this year. PDVSA, which is under pressure to cut expenses by 60 per cent because of tumbling revenues, is estimated to owe as much as $12bn (€8.9bn, £7.9bn) to contractors since suspending payments to them last August, shortly after oil prices began their precipitous decline.

It has demanded that companies accept a 40 per cent cut in their bills, arguing that the decline in oil prices means they are charging too much. The new law will also enable PDVSA to pay debts with bonds rather than cash, and compensate assets at book value.

The move is the latest symptom of the cashflow crisis that has bedevilled the state oil company for two years as it has become burdened with responsibilities removed from its core business – in particular funding and running social programmes that are the bedrock of Mr Chávez’s support.

But analysts say that by shifting its problems on to its suppliers, PDVSA is storing up bigger problems for the future. Not only does it lack the ability to operate as efficiently as the service -providers, but it sends a grim signal to companies considering investing in Venezuela.

Perhaps of most concern is the impact this measure could have on foreign companies’ interest in an auction to develop the Carabobo block in the oil-rich Orinoco Belt, which is the first oil investment opportunity in Venezuela in the past decade and represents the country’s biggest hope for reviving production. The International Energy Agency estimates that production fell to 2.36m bpd in 2008, compared to 3.18m bpd in 1997. PDVSA claims it increased to 3.27m bpd in 2008.

Some 19 companies – including BP, Chevron, Shell, StatoilHydro, and Total – have expressed interest in bidding for the Carabobo projects that could collectively produce more than 800,000 bpd, and require investments of up to $30bn.

But adding to worries about the lack of legal security in Venezuela, intensified by recent developments, oil companies are also concerned by high start-up and financing costs as well as tight profit margins owing to fiscal terms that were drawn up before oil prices began their decline.

“Venezuela’s aggressive fiscal terms and the country’s trend toward nationalisation of oil industry activities will make it more difficult to attract foreign investment and competitive bids from qualified operators,” says David Voght, a director at IPD Latin America, which advises international oil companies in Venezuela.

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